CHAPTER 5

Karl Marx and the Economics of Das Kapital

DESPITE the central position occupied by an interpretation of historical change in Marx’s thought, his economic writing was focused primarily on only one stage of historical evolution. The objective of his major work, as he described it, was to ‘lay bare the economic law of motion of modern society’1 – i.e. of the capitalist mode of production. Though his scheme did provide the basis for an interpretation of pre-capitalistic productive arrangements, he made no systematic analysis of the economic system that would replace capitalism following the collapse he held to be inevitable.

1. KARL MARX (1818–83)

Marx’s career blended the retirement of the philosopher and scholar with the active life of the organizer and propagandist. In one role, he was a student of the dynamics of society; in the other, he was an interventionist who sought to hasten social change. These diverse facets of the man and his activities were closely associated. It was through a process of detached intellectual inquiry that he first identified the causes he sought to promote and he carried over much of the manner of the scholar to his role in public affairs. For a political organizer his style was remarkably austere.

Born to an upper middle-class Rhineland family that had forsaken Judaism in favour of the established church, his early years were largely conventional. He entered the university to study law, but changed his plans after the lively debates on Hegelian philosophy in Berlin in the 1830s captured his imagination. He identified himself with the Young Hegelians who sought to transform Hegelian orthodoxy into a radical social doctrine. With this cause in mind, Marx in his mid-twenties aspired to a university post as a philosopher. This dream soon died when the Prussian Minister of Education proscribed the Hegelian Left.

Obliged by the death of his father to find a means of supporting himself, he turned to journalism, writing for a newly-founded anti-government journal published in Cologne. He flourished in this enterprise, which afforded him an opportunity to agitate for political reform and to sharpen his skills in writing trenchant prose. Within a year, he had risen to the post of editor. This episode was short-lived. In 1843, the government censor banned the publication and Marx set off for Paris to assist in the editing of another journal.

During the next two years, the framework of ideas with which he worked began to take clear shape. While in Paris, he devoured the major literature of economic theory. Life there also brought him into contact with most of the leading members of the Continental Left and it was then that his partnership with Friedrich Engels began. This phase ended in 1845 when the French government, prompted by official Prussian protests against the contents of the publication with which he had been associated, expelled him.

In 1849 – after a period of hectic political activity that included collaboration with Engels in the drafting of the Communist Manifesto – he went into exile in London where he was to spend the remainder of his days. During these years, he passed the bulk of the daylight hours in the reading rooms of the British Museum. The materials he gathered were woven into his major contribution to economic theory – the three volumes of Das Kapital.

Few serious students of social problems can have worked under hardships comparable to those Marx endured. The small sums he could eke out from free-lance journalism (plus the charity of the devoted Engels) were insufficient to keep creditors from the door. Even when living in the most miserable housing conditions – conditions that a Prussian spy assigned to check on his activities reported on with horror – Marx was unable to afford adequate nutritional and medical attention for his family. When he wrote of poverty, it was not an exercise of the imagination.

2. MARX AND THE CLASSICAL TRADITION

Much of Marx’s sharpest polemical writing was directed against the classical tradition of economic thought. He attacked the analytical procedures employed by classical writers as well as the conclusions they had reached. Nevertheless, his relationship to the classical tradition must be described as ambivalent. Despite his hostility towards classical economics, he made much of its analytical framework his own. Though he embellished, modified, and poured new meaning into the classical categories, he inherited the core of his system from the classical economists.

In Marx’s hands the familiar classical questions were re-opened: in particular, what are the laws governing the distribution of income and how do they affect the economy’s long-period prospects? He also appropriated classical insights on many points of detail. As had the mainstream of the classical tradition, he approached the problem of value in terms of labour and regarded only physical objects as embodiments of value. In addition, his scheme of income distribution was organized around a set of social class categories and his theory of accumulation was linked to the behaviour of profits.

Marx’s philosophical presuppositions about history and his claim to have discovered its inner logic both gave established categories a different significance and supplied the springboard for fresh departures. His general modus operandi can be instructively observed in his critique of Malthus. This polemic, moreover, is of particular interest in its own right: Malthus’s population principle, which had been interpreted as demonstrating that members of the working class had only themselves to blame for their misery, had to be demolished before Marx’s alternative explanation of poverty could stand.2

The manner in which Marx invoked his view of historical stages to undercut Malthusian population doctrine can be seen in the following passage:

The labouring population . . . produces, along with the accumulation of capital produced by it, the means by which itself is made relatively superfluous, is turned into a relative surplus population, and it does this to an always increasing extent. This is a law of population peculiar to the capitalist mode of production; and in fact every special historic mode of production has its own special laws of population, historically valid within its limits alone. An abstract law of population exists for plants and animals only, and only in so far as man has not interfered with them.3

In short, capitalism did, in fact, create the appearance of a redundant population. But, contrary to Malthusian teaching, such population pressures were not universal throughout time and space. A change in productive arrangements could readily convert an apparent surplus of population into a shortage.

Marx’s reasoning on this point rested on his distinction between various ‘modes of production’, each with unique characteristics. In the pre-capitalistic mode private ownership of the means of production was far from universal and, to the extent that private property was recognized, it was qualified by a reciprocal pattern of rights and obligations along feudal lines. Moreover, production for exchange was far from ubiquitous. The emergence of capitalism led to the rapid breakdown of these patterns. Most importantly, the use of machine techniques created a sharp cleavage within society. Those who owned the means of production and those who worked with them were divided into distinct groups. No longer was it possible for the worker to possess the tools with which he gained a livelihood; instead he became dependent on others to supply them. Meanwhile the widening of the market called for higher and higher degrees of specialization which heightened the interdependence between various components of the economic system. Hence arose one of the ironies (‘contradictions’ in Marx’s terms) within the capitalist mode of production. On the one hand, it was organized on the basis of property relationships that were private; on the other, its production processes involved social relationships that were co-operative in character. Marx maintained that this situation inevitably bred tensions – tensions which would lead to the violent collapse of capitalism and which could not otherwise be resolved. Under a later socialist arrangement conflict would be replaced by harmony. The means of production would be owned collectively and both the mode of production and the productive relationships would be social in character. Class conflict could no longer occur because the very basis of class divisions – private ownership of the means of production – had been eliminated.

It might be thought that Marx’s discussion of stages of economic evolution had been anticipated by some of the early classical writers. Smith, for example, had written about earlier types of economic arrangements in his consideration of an ‘early and rude’ stage of society. Marx’s approach, however, was profoundly different. Classical writers had in mind a hypothetical state in which transactions were conducted by barter and which, in turn, could be used as a benchmark for analysing production and exchange under the simplest conditions conceivable. Marx, on the other hand, was concerned with specific historical epochs, rather than hypothetical cases, and he looked at history as a succession of stages governed by immutable laws.

It was against this background that Marx accused the classical economists of propagating gross error. Their findings, he maintained, failed to take into account the full significance of the inner dynamics of the historical process. In addition, classical writers did not comprehend that each stage of history was governed by economic laws peculiar to itself. A universal law of population was thus out of the question. Each mode of production produced its own social conditioning in forms which affected all human behaviour, including man’s reproductive activities.4

Apart from his quarrel with classicism on method, Marx’s philosophical premises also called for an important amendment in a basic set of classical categories. To the classicists, the social groupings important to the analysis of income distribution involved three classes: capitalists, landlords, and labourers. Marx insisted, on the other hand, that under capitalism this scheme would be compressed into a two-fold division based on legally- recognized rights to property. In his analysis the essential class groupings of capitalism separated those who owned the means of production from those who did not. As owners, capitalists and landlords were thus a common genus. In Marx’s view it was a ‘Physiocratic illusion’ to hold that ‘rents grow out of the soil and not out of society’.5

3. THE ANALYSIS OF VALUE

Marx’s debts to his classical forerunners were particularly marked in the framework he adopted for the analysis of value. Here he appropriated the essentials of the Ricard- ian labour-input approach. Labour was held to be the only productive agent and the source of all value. Following Ricardo, capital goods were regarded as stored-up labour. Land, however, virtually disappeared as a separate element in the production scheme. Anything economically interesting about land could be dissolved into labour inputs.

Marx’s version of the labour-input approach to value, however, involved a number of modifications to Ricardian procedure. His amendments did not alter the substance of the argument appreciably but they considerably advanced its sophistication. His treatment of the familiar problem presented by the lack of homogeneity in the labour force provides an interesting case in point. The standard classical escape from this difficulty had rested on an appeal to wage differentials established in the market as a basis for weighting the economic contribution of members of the labour force. This technique, it will be recalled, was not strictly admissible on classical premises: if market prices were acceptable as measures of the value of labour, why were they not adequate in the market for commodities? Marx cannot be faulted on this score. In his view the value of labour-power was itself established by labour- inputs. ‘The value of labour-power is determined,’ he asserted, ‘as in the case of every other commodity, by the labour-time necessary for the production, and consequently also the reproduction, of this special article.’6 In other words, the labour-time necessary to provide the means of subsistence for the work force and to permit its replacement in the next generation governed the value of unskilled labour. This amounted to a subsistence interpretation of the standard wage, though Marx was at pains to point out that the composition of the ‘subsistence’ bundle was not inflexible; instead it was subject to adaptation with changes in the social environment.7

Labour-input requirements for ‘necessaries’ thus established the floor beneath which wages could not sink. But differentials in the remuneration of wage earners were regulated by another type of labour input: the labour- time involved in equipping workers with skills. Here Marx picked up a thread Mill had left dangling when the latter, in his protests against the earlier classical usage of the term ‘productive’, insisted that the training of workers (though not an activity directly involving the production of material objects) should normally be treated as ‘productive’.

Marx tightened the concept of labour-input further by stating explicitly the conditions under which inputs of labour were to count as creating value. The fact that labour time had been poured into the production of useful tangible commodities was not, he maintained, a sufficient test. Only ‘socially necessary’ inputs of labour time – by which he meant ‘that required to produce an article under the normal conditions of production, and with the average degree of skill and intensity prevalent at the time’8 – could qualify. Marx illustrated the force of this restriction in an example dealing with the manufacture of textiles:

The introduction of power looms into England probably reduced by one-half the labour required to weave a given quantity of yarn into cloth. The hand-loom weavers, as a matter of fact, continued to require the same time as before: but for all that, the product of one hour of their labour represented after the change only half an hour’s social labour, and consequently fell to one-half its former value.9

In his attitude toward the displacement of labour produced by the competition between advanced and traditional techniques of production, Marx sharply differentiated his position from that of many contemporary critics of industrialism. Marx had no patience for the sentimentalism of those who called for a return to rustic simplicity and who sought to turn their backs on technological progress. He insisted that the advance of mechanization in the capitalist system, however unhappy its consequences in some respects, at least had the not inconsiderable merit of adding enormously to productive capacity.

Marx attached another restriction to his analysis of value – one that further reflected his preoccupation with the study of the capitalistic mode of production. Production for exchange, he asserted, was a prerequisite of value. Pre-capitalistic arrangements could produce outputs, but by Marxian definitions, they could produce neither commodities nor value.10

Once these conditions had been added there was no question in Marx’s mind that exchange values (or relative prices) were regulated unequivocally by the labour inputs required in the production of commodities. Under capitalism, exchange ratios between commodities would be expressed in money terms, but this was possible only ‘because all commodities, as values, are realized human labour, and therefore commensurable, that their values can be measured by one and the same special commodity, and the latter converted into the common measure of their values, i.e. into money’.11 At this stage in the argument the Ricardian puzzles about unequal durability of the components of fixed capital and the absence of uniformity in the proportions of fixed and circulating capital dropped out of the picture, though Marx later addressed himself to them in other contexts.

4. THE CONCEPTS OF SURPLUS VALUE, VARIABLE CAPITAL, AND CONSTANT CAPITAL

While Marx appropriated many of the building blocks of the classical labour-input version of the theory of value, he put them to work for another set of purposes. With the aid of his argument that the value of labour and the value of commodities were governed by the same principles, he was equipped to provide an alternative interpretation of the mechanisms of production and distribution in capitalist societies. The position he adopted was reinforced subsequently by his analysis of the consequences of the accumulation of capital. The initial steps, however, grew directly out of his theory of value.

This extension of the argument involved the re-assertion of the conclusion that the value of labour-power was based on labour inputs required for its subsistence and training. In a capitalistic system, workers would be obliged – simply as a condition of survival – to sell enough of their labour time to acquire the means of subsistence. But, in the conditions of capitalist production, more labour time would be demanded from labourers than was necessary to produce values equivalent to their subsistence requirements. In the absence of alternative sources of a livelihood, labourers would not only have to sell their time to capitalists but to accept the terms and conditions set by their employers. Workers, for example, might be able to produce enough to cover subsistence requirements in a six-hour working day, but employers could insist on labour inputs of longer duration. The working day was thus divided into two components: the ‘necessary’12 labour time required for the production of values equal to maintenance requirements and ‘surplus’ labour time.

In Marx’s view the commanding position in the power hierarchy attached to the ownership of the means of production enabled capitalists to demand a working day in excess of necessary labour time and to appropriate the value created during surplus labour time for themselves. Indeed, Marx insisted, the creation of surplus value was the whole point of hiring workers in the first instance. From the employer’s point of view the power of labour to create more value than was passed on to it in wages was a pre-condition of employment. This ‘circumstance’, as Marx described it, ‘is, without doubt, a piece of good luck for the buyer [of labour], but by no means an injury to the seller.’13

The special power of labour to generate surplus value provided the rationale for Marx’s designation of wage payments as ‘variable capital’. This usage, though puzzling to those schooled exclusively in modern terminology, was clearly in the classical lineage. For Marx (as for the classical economists) the general term ‘capital’ was used to refer to the resources available for initiating and sustaining production. These resources could be allocated in varying proportions between the required productive inputs – e.g. labour, raw materials, and plant and equipment. In the mainstream of the classical tradition, two categories of capital – fixed and circulating – were distinguished. The line of demarcation was generally drawn on the basis of the length of the time periods before the values contained in these components of capital could be realized through sale.

Marx modified this procedure by dividing capital into a ‘variable’ component (the wage bill) and a ‘constant’ component (raw materials and depreciation allowances for plant and equipment). These distinctions turned on his concept of the surplus-generating capacity of direct labour inputs. Active labour, he maintained, had the unique property of ‘being a source not only of value, but of more value than it has itself’.14 Indeed, the circumstances of capitalist production were such that labour would be hired only when surplus value could be appropriated. By contrast, the items of constant capital were embodiments of past labour inputs and thus inert. Their contribution to the productive process, though important, was passive; they could impart no more value to the final product than they themselves contained. In Marx’s words: ‘However useful a given kind of raw material, or a machine, or other means of production may be, though it may cost £150, or say, 500 days’ labour, yet it cannot, under any circumstances, add to the value of the product more than £150.’15

These definitions, occupied a strategic position in the unfolding of Marx’s analysis. Three important ratios were built around them. The first image related the capitalist’s surplus to the wage bill and was described both as the ‘rate of surplus value’ and as the ‘rate of exploitation’. The two components of capital could also be expressed in a ratio form image; this relationship, labelled the ‘organic composition of capital’, provided a convenient device for expressing variations in the proportions of constant to variable capital. All three variables entered into the ‘rate of profit’ image. This notion was clearly allied to the classical tradition in which the rate of profit was treated as the percentage return on the outlays advanced to labour as well as on the current costs of raw materials and fixed capital. The bulk of Marx’s dynamic analysis was organized around the expected behaviour of these ratios.

5. THE ANALYSIS OF ACCUMULATION

Like the contributors to the classical tradition before him, Marx held that accumulation arose from the income shares received by property owners. But his general view of the economic process yielded a different insight into the nature of this ‘net’ revenue. Within Marx’s framework of analysis, it could be maintained that the generation of surplus value was indeed the defining structural characteristic of the capitalist system. Given the property relationships of capitalism, workers were obliged to put themselves at the mercy of capitalists in their struggle to gain subsistence and they were, in turn, bound to contribute surplus labour time.

The consequences of the creation of surplus value under capitalism were powerfully influenced by the use of machinery. Machine techniques meant that the ranks of the eligible participants in the capitalist process were swollen. Positions in the labour force were now created, for example, for women and children (who could be employed more cheaply than men in a large number of newly-created repetitive tasks). At the same time, the advance of machine techniques augmented the leverage of capitalists by placing new instruments of control over the duration and intensity of labour input at their disposal. No longer could the productivity of the labour force be significantly influenced by the skills and initiative of workers themselves. Instead, the rhythm of the machine established the pace of work. However unhappy the consequence might be for the dignity of workers, these procedures nevertheless increased productivity enormously. It is interesting to note that in some modern discussions of the problems of underdeveloped countries, a similar argument is now invoked to support the introduction of highly capital-intensive techniques, despite the fact that a large potential labour force might be available at low wages. Where a tradition of industrial discipline is lacking, an industrial build-up based on highly mechanized techniques has the not unimportant recommendation of insuring automatic checks on labour efficiency. Machine-dominated processes must usually be operated in accordance with a scheduled pace if they are to function at all.

The extended use of machinery had other significant effects. By virtue of the fact that higher techniques increased the productivity of labour – i.e. labour inputs per unit of output were reduced – the value of commodities was depressed. At the same time, Marx maintained that the rate of surplus value would tend to rise because the cheapening of commodities would shorten the number of working hours required to produce the means of subsistence. The latter effect, of course, was at odds with the outcome expected by writers in the mainstream of classicism. Most theorists in this tradition held that the ‘progress of improvement’ would tend to increase the quantity of labour input required to produce necessaries. This conclusion had been based on the special conditions governing the production of food. As they saw the problem, larger national food requirements would necessarily tend to shrink the capitalist’s surplus by raising the cost of the main component of subsistence. Marx rejected this analysis, arguing that the dividing line between commercialized agriculture and industry was not as sharp as the classical tradition had supposed. Instead, he maintained that capitalist production, by its nature, spread its tentacles throughout the economic structure. The industrial segment of the economy might be the dynamic engine of change. But the mere growth of capitalism would tend to homogenize conditions of production throughout the economy. In fact, he insisted:

In the sphere of agriculture, modern industry has a more revolutionary effect than elsewhere, for this reason, that it annihilates the peasant, that bulwark of the old society, and replaces him by the wage labourer. Thus the desire for social changes, and the class antagonisms are brought to the same level in the country as in the towns. The irrational, old fashioned methods of agriculture are replaced by scientific ones.16

This view reflected Marx’s rejection of classical definitions of profits and rents. From his perspective, what counted was ownership of the means of production: nothing of substance distinguished the capitalist from the landlord. Both were in a position to exploit labour and to extract surplus value from it. Similarly, the physical constraints on the rapid expansion of agricultural output (to which writers of a classical persuasion had given so much attention) were de-emphasized. The application of new techniques to agricultural production promised to raise productivity sufficiently to satisfy the food requirements generated by industrial expansion. This did not mean that rents disappeared completely from the Marxian vocabulary. They remained, but were no longer unique to land. They might arise as the result of qualitative differentials in any of the productive agents. With this set of arguments Marx disposed of the other support to the Malthusian fear that population would tend to outstrip the availability of food.

The appropriation of surplus value by capitalists also permitted accumulation – indeed it was pre-requisite to accumulation on a substantial scale. It afforded the command over labour that Smith had written about; Marx merely added the qualification that it was ‘essentially the command over unpaid labour’.17 Nor did he entertain any doubt that a significant share of the surplus value claimed by capitalists would be used for the purpose of extending their capitals and, most particularly, for the acquisition of machinery. Further, the application of higher technologies meant that the value of commodities – measured in labour inputs – would be reduced. Commodities were thus ‘cheapened’. This process would snowball because capitalists would be obliged to join in the race of competitive cheapening of commodities. Their own survival depended on their ability to acquire and use machinery for the purpose of raising the productivity of labour; otherwise, they would be killed off in the competitive struggle. The system itself thus compelled capitalists to accumulate and to introduce labour-saving innovations. Marx described the process in the following language:

Only as personified capital is the capitalist respectable. As such, he shares with the miser the passion for wealth as wealth. But that which in the miser is a mere idiosyncrasy is, in the capitalist, the effect of the social mechanism, of which he is but one of the wheels. Moreover, the development of capitalist production makes it constantly necessary to keep increasing the amount of capital laid out in a given industrial undertaking, and competition makes the immanent laws of capitalist production to be felt by each individual capitalist, as external coercive laws. It compels him to keep constantly extending his capital, in order to preserve it, but extend it he cannot except by means of progressive accumulation.18

And again:

Accumulate, accumulate! That is Moses and the prophets!. . . Therefore, save, save, i.e. reconvert the greatest possible portion of surplus-value, or surplus-product into capital! Accumulation for accumulation’s sake, production for production’s sake . . .19

This explanation of the incessant drive of capitalists had wide implications. Within Marx’s system the capitalist was often described as a ruthless exploiter. Even so, Marx held it to be inappropriate to attach blame to the capitalist as a person, a point he made clear in the preface to the first edition of Capital:

I paint the capitalist and the landlord in no sense couleur de rose. But here individuals are dealt with only in so far as they are the personification of economic categories, embodiments of particular class-relations and class interests. My standpoint, from which the evolution of the economic formation of society is viewed as a process of natural history, can less than any other make the individual responsible for relations whose creature he socially remains, however much he may subjectively raise himself above them.20

In short, energies devoted to condemning the behaviour of capitalists were misplaced. As Marx observed in another context: ‘What avails lamentation in the face of historical necessity?’21

Clear limits, however, were attached to the amount of accumulation undertaken at any one time. Marx stated these limits in terms that flowed directly from his labour- input analysis of value. Investment in machinery, he maintained, would be worthwhile only when it resulted in the displacement of labour. The value of a commodity could be reduced only to the extent that the labour content of the final output had shrunk. From the capitalist’s point of view it would be worthwhile to acquire additional machinery only when the sum of direct and indirect labour inputs would subsequently be lower than had formerly been the case. In Marx’s words, ‘the limit to his using a machine is fixed by the difference between the value of the machine and the value of the labour-power displaced by it’.22

This line of argument, virtually by definition, made the substitution of machinery for labour a precondition for the acquisition of capital goods. This proposition was crucial to the embellishment of Marx’s model. Ricardo had anticipated the conclusion in the chapter ‘On Machinery’ in the third and final edition of his Principles. He then amended his earlier support for the position that the immediate competition between machinery and employment would be offset by releases of funds which could be used to engage more labour.23 The mainstream of classicism, it will be recalled, rested its case on the argument that this compensating effect would shortly neutralize – by swelling profits and thereby increasing the subsequent demand for labour – any short-term appearances of technological unemployment. This view, Marx insisted, was fallacious in that it presupposed that all of the ensuing gains to the capitalist would be ‘destined to support labour’. Marx, on the contrary, maintained that the laws of motion of capitalism demanded that part of the expanded surplus be allocated to the acquisition of machinery. Moreover, when this occurred, the total demand for labour would necessarily diminish. Marx, of course, recognized that the introduction of higher techniques might be associated with reductions in costs and with growth in the volume of output. To this extent, mechanization might generate additional demand for labour in industries producing machines and supplying raw materials. Such gains in employment he held to be temporary and soon to be neutralized by the accumulation of machinery by capitalists engaged in supplying these inputs.

But even this short-lived stimulus to the demand for labour might be swamped by forces moving in a counter direction. Among its other consequences, the increased use of machinery would have the effect of killing off the jobs of those who worked with older and inferior techniques. Handicraft workers would be among the first to feel the sting of the spread of industrialism; much of their labour time would become ‘socially unnecessary’. Later, as the application of industrial techniques gained momentum, the weaker and smaller capitalists would be destroyed. In this phase, the battle of competition, Marx maintained, ‘always ends in the ruin of many small capitalists, whose capitals partly pass into the hand of their conquerors, partly vanish’.24 This combination of forces would produce a situation in which the total demand for labour would expand less rapidly than the numbers eligible for employment. In Marx’s words:

Since the demand for labour is determined not by the amount of capital as a whole, but by its variable constituent alone, that demand falls progressively with the increase of the total capital, instead of . . . rising in proportion to it. It falls relatively to the magnitude of the total capital, and at an accelerated rate, as this magnitude increases. With the growth of the total capital, its variable constituent or the labour incorporated in it, also does increase, but in a constantly diminishing proportion.25

The problem to which Marx was here directing attention has by no means lost its pertinence in the modern world. It is still a widely held view that labour-saving technological improvements should be welcomed on the grounds that, whatever their short-term effects on the labour market, their long-term effects must necessarily be favourable to the economy at large. In the history of Western industrial countries there is a substantial basis for this view. In a number of underdeveloped countries, however, it has become increasingly apparent that the adoption of modern techniques of manufacture may have unfortunate ‘backwash’ effects on established lines of employment. The consequences of this situation are especially serious in underdeveloped economies nowadays where, in most cases, the population of working age is growing at considerably faster rates than was the case in Western countries at comparable periods in their industrial emergence. Some governments – perhaps most notably the government of India – have attempted to minimize the risks of job displacements from the introduction of modern technologies by restricting their use to product lines which do not compete with established manufacturing enterprises.26 This approach to policy builds on an insight that was initially Marxian, though Marx himself would have rejected it. Within his perspective, policy measures designed to alter the course of history were inevitably fruitless and vain.27

As Marx saw it, the mechanism of accumulation under capitalism could be explained in the first instance by the creation of surplus value and by the pressures on the capitalists to re-invest a substantial part of that surplus. The significance of the process he was describing extended well beyond the domain of economic causes and effects as narrowly construed. By its very nature, capitalism was bound to produce an ever-widening cleavage within the social stucture. Increasingly labourers would be debased in skill and reduced to the status of operatives performing routine and repetitive tasks. This debasement of skill, it may be noted in passing, had the analytical consequence of simplifying the measurement of output in labour units, for the dynamics of the capitalist system itself tended to standardize the labour force. Meanwhile, the displacement of labour by machines would increase the number of jobless and swell the ranks of the ‘reserve army of unemployed’. The capitalist mode of production, Marx maintained, required this outcome both to maintain the power position of capitalists and to ensure that an abundant labour supply would be available at subsistence wages. Increasing misery among the proletariat was a necessary by-product of these mechanisms. As Marx saw the outcome of this phase of capitalism: ‘. . . in proportion as the productiveness of labour increases, capital increases its supply of labour more quickly than its demand for labourers. The overwork of the employed part of the working class swells the ranks of the reserve, whilst conversely the greater pressure that the latter by its competition exerts on the former, forces these to submit to overwork and the subjugation under the dictates of capital.’28

Meanwhile, at the other end of the social spectrum, the situation of capitalists – or at least of those who retained a position as owners of the means of production – would be improved. They could now afford to indulge themselves in luxuries and economic inequalities would be widened. The number of successful capitalists, however, was likely to shrink. With the spread of machinery, only the strong could survive; the weak would be ground under. This proposition applied to capitalists fully as much as to the proletarian class. Caught up in the dynamics of the system, many of the smaller capitalists would find themselves pushed down the social scale to become, like the workers they had formerly employed, dependent on property owners for an opportunity to gain a livelihood. Concentration and centralization of the ownership of the means of production thus marched hand in hand with increasing misery and inequality.

6. THE ANALYSIS OF DISTRIBUTION

Marx had enough in common with the classical tradition to give a prominent place in his model to the mechanisms of income distribution. Indeed, the laws governing distribution were crucial to his account of the dynamics of the capitalist mode of production. At the same time, he redefined the categories of distributive shares. No longer was the dividing line one which distinguished the roles of the capitalist, landowner, and labourer. For Marx, a two-fold class schema was sufficient. What mattered was the separation of those who had a legally recognized stake in the ownership of the means of production from those who did not. On this basis the distinction between agriculture and industry – to which the classical tradition had attached so much importance – largely evaporated.

Nevertheless, Marx appropriated from the mainstream of classicism two of its main conclusions about the behaviour of distributive shares during a period of dynamic change. In both models the real wage was expected to gravitate around a subsistence norm and the rate of profit was expected to fall. Marx’s solution, however, was distinctive in that he offered an entirely different explanation for these phenomena.

The classical account of the behaviour of real wages, it will be recalled, was organized around Malthusian population postulates. Marx, for reasons indicated earlier, was determined to demolish the Malthusian approach to this matter. In his view the basic explanation for the perpetuation of subsistence wages was rooted in the mechanics of the capitalistic system. The process of technological displacement – which followed as an inevitable consequence of accumulation – meant that the reserve army of unemployed was swollen. On this point he asserted that ‘. . . it is capitalist accumulation itself that constantly produces and produces in the direct ratio of its own energy and extent, a relatively redundant population of labourers, i.e. a population of greater extent than suffices for the average needs of the self-expansion of capital, and therefore a surplus-population’.29

The existence of this reserve army was sufficient to explain the tendency for real wages to be tied to subsistence. As long as capitalists could tap unemployed workers to replace any among those employed who sought higher pay, there was no reason to expect the circumstances of the poor to improve. On this point Marx directly challenged the classical view that workers should be encouraged to limit their reproductive rates in the interests of restricting the labour supply and of enhancing their bargaining prospects. He described as ‘folly’ that ‘economic wisdom that preaches to the labourers the accommodation of their number to the requirements of capital. The mechanism of capitalist production and accumulation constantly effects this adjustment. The first work of this adaptation is the creation of a relative surplus-population, or industrial reserve-army.’30

It did not follow, however, that the real wage would never deviate from the subsistence level. For short periods it was at least conceivable that unusually intense demand for labour might bid wage rates beyond the tolerable minimum. Even Malthus had recognized that this might occur. In both the Marxian and classical traditions it was held that any tendency in this direction would soon be offset by forces inherent within the economic system – forces that would depress wages back toward their ‘natural’ level. But quite different explanations of this phenomenon were offered by the classical and the Marxian analyses. Malthus saw the adjustment occurring on the supply side of the labour market; improvements in the real wage, he had argued, would lead to increases in the labour force which would compete wage rates downward. Marx, on the other hand, saw the adjustment as occurring in the demand for labour. He described the path toward the restoration of the subsistence norm as follows:

If the quantity of unpaid labour supplied by the working class, and accumulated by the capitalist class, increases so rapidly that its conversion into capital requires an extraordinary addition of paid labour, then wages rise, and, all other circumstances remaining equal, the unpaid labour diminishes in proportion. But as soon as this diminution touches the point at which the surplus-labour that nourishes capital is no longer supplied in normal quantity, a reaction sets in: a smaller part of revenue is capitalized, accumulation lags, and the movement of rise in wages receives a check.31

Marx thus arrived at the classical conclusion about the behaviour of real wages during a period of economic expansion via a different route. By the same token he offered an alternative explanation of another classical phenomenon: the long-term tendency for the rate of profit to fall. Within the classical tradition, the behaviour of profits was analysed primarily in terms of the redistribution of income between the shares of profits and rent. Productive conditions in agriculture, it had been argued, led to rising rents and to increases in the price of subsistence goods. Higher money wage payments would thus be required in order to maintain the subsistence wage. Capitalist employers, by virtue of rising wage costs, would be obliged to accept lower rates of return on their capital outlays.

This line of explanation was obviously closed to Marx. Having eliminated the classical concept of rent from his analysis and having denied the existence of significant differences in the productive conditions of industry and agriculture, he could not invoke rising food costs in his account of the behaviour of profits. Instead he chose to develop the argument around changes in the values of his three fundamental ratios: the rate of surplus value (or of exploitation) image; the organic composition of capital image; and the rate of profit image.32

The analysis of the behaviour of one of these ratios – that of the organic composition of capital – presented no complications. The bulk of the Marxian model had already been developed around the view that the pressure on capitalists to accumulate would mean that outlays for constant capital would grow faster than expenditures on variable capital. If Marxian propositions on the technological unemployment supposedly generated by the accumulation of capital were accepted, it then necessarily followed that the organic composition of capital would rise.

The behaviour of the rate of surplus value (or the rate of exploitation) was less straightforward. In the bulk of his numerical illustrations Marx suggested that this rate was 100 per cent; i.e. that the wage bill and surplus of the capitalist were equal. Marx nowhere argued explicitly that the rate of surplus value should be regarded as a constant, nor did he demonstrate that it should be 100 per cent. He did maintain, however, that the inner mechanics of the capitalist system prevented more than temporary reduction in the established rate of surplus value on the ground that any tendency for wages to rise would be countered by increased investment in labour-displacing machinery.33

An increase in the rate of exploitation, however, was not precluded. Reductions in the labour-inputs required to produce the commodities entering into the subsistence wage would make it possible to extend surplus labour time at the expense of necessary labour time. Nevertheless, Marx appeared to have assumed that the rate of exploitation was, in fact, constant.

If the assumption of a constant rate of exploitation is combined with a rising organic composition of capital it follows that the rate of profit image must fall. When s and v are equal and c is growing at a faster rate than either s or v, the value of the denominator in this expression increases more rapidly than the value of the numerator. In this fashion Marx could reach a conclusion similar to the one arrived at by classical economists on the long-term behaviour of the rate of profit.34

This line of argument was not without pitfalls. In particular, one of its conclusions contradicted a vital piece of Marx’s earlier argument on the course of real wages. Presumably the process of capital accumulation raises the productivity of labour and increases the size of the net product (v + s). When the proportion of s to v remains constant, growth in the size of the net product would imply that total wage payments (v) increased – and quite probably at a faster rate than the volume of employment was likely to grow. Mechanization, after all, was expected to suppress the rate of growth in the demand for labour. This outcome, however, would imply that the portion of the labour force remaining in employment would enjoy improvements in real earnings. The prospect that sustained increases in real wages might occur under capitalism cannot be reconciled with the main thrust of Marxian argument, nor can this conclusion be reconciled analytically with the existence of a reserve army of unemployed. Marx appeared to have been unaware of this inconsistency in his analysis.

7. THE MARXIAN THEORY OF CRISIS

Both the main-stream of classicism and of Marxian analysis contained a type of teleological reasoning; i.e. they saw the natural laws of economic dynamics as propelling the system toward a predestined end. In the case of classical writers the economic system was interpreted as set on a course toward the stationary state. For Marx, on the other hand, the telos of capitalism was an inevitable and violent collapse. But whereas classical writers held that appropriate economic policies could postpone the onset of the stationary state, Marx maintained that no human contrivance could alter the destiny of the capitalist system.

Marx offered two distinct explanations of the crisis in which the capitalist order would be destroyed. He regarded these explanations as interdependent and mutually reinforcing. They can, however, be examined separately. In fact, his conclusions follow from only one of the two sets of arguments.

His first account of the capitalist crisis was built around an elaboration of distinctions he had drawn in his portrait of the capitalist system. The essential concept in this context was the division of the economy into two ‘departments’: one producing the means of production, the other producing the means of consumption. The relationships between these departments were then examined under differing sets of assumptions. In the simplest case (which he described as ‘simple reproduction’) neither net saving nor net investment occurred and output would be unchanged from one time period to the next. His analysis of the matter took the following form. In Department I (producing the means of production) the gross value of output would be equal to labour inputs and could be represented as the sum of C1 + V1 + S1. Similarly, in Department II (in which the means of consumption were produced) the gross value of output could be stated as the sum of C2 + V2 + S2. In both departments, of course, means of production were employed and used up in the process of creating output. For this reason, if production was to be continued on the same basis in the succeeding period, the supply of replacements forthcoming from current outputs of producer goods had to cover the current utilization of constant capital. By the same token the output of Department II had to equal the requirements for consumption goods generated in both departments.35 Even in this simplest of cases the maintenance of a self-perpetuating equilibrium required a delicate balance between the two departments.

As a practical matter Marx saw that the task of achieving this balance was complicated by a number of factors. Realism demanded that a third department – one producing luxuries to satisfy part of the consumption demands of capitalists – be added. In addition, account had to be taken of the fact that a portion of the capitalist’s surplus was allocated to net accumulation. The maintenance of the self-sustaining equilibrium thus became an increasingly intricate operation and could easily be disturbed by nothing more unusual than the acquisition of assets of unequal durability – a situation which would later lead to an uneven timing of replacement requirements and to fluctuations in the demand for producer goods. Marx’s treatment of this point carried overtones of Ricardo’s analysis of the consequences of inequalities in the life of capital goods. But, whereas Ricardo was concerned with the implications of this problem for a labour-input theory of value, Marx attached more importance to it as a threat to the stability of capitalism. Any departure from the conditions necessary to sustain the system on an even keel during the course of the normal process of capital accumulation would frustrate producers in one of the departments, give rise to the accumulation of unwanted stocks, and provoke a price-cutting panic (or in Marx’s terms, a ‘realization’ crisis).

Marx’s analysis of the chronic instability of capitalism contained the germs of a theory of the business cycle. Though he could argue that the intricacy of the network of production and exchange made the system both vulnerable and highly sensitive to disturbances, he was too closely wedded to the classical tradition of Say’s Law to provide a systematic demonstration of cyclical fluctuations. Within his system there could be no deficiency in total demand: only capitalists were in a position to save; and what they saved went into investment expenditure. At the same time he could invoke the classical conclusion on long-term reductions in the rate of profit in support of the argument that each malfunctioning of the system was likely to intensify the aggressiveness of capitalists.

Marx was correct – and ahead of his time – in emphasizing that tendencies toward instability were inherent in industrial capitalism. But it did not follow from this phase of his analysis that fluctuations would necessarily culminate in a breakdown of the system. More was required for such a demonstration. Marx thought he supplied the additional ingredients in a second theory of crisis with arguments that rested more on his philosophical presuppositions than on his economic analysis.

The process he saw at work can be summarized as follows: capitalism bred heavy accumulations of fixed capital; as these accumulations mounted in volume, the size of the reserve army of unemployed was swollen. For the working class, misery and distress were intensified. Meanwhile the ranks of the proletariat were further enlarged by recruits from the capitalist class, primarily by small entrepreneurs who had been crushed in the war of industrial giants. As Marx described these aspects of the unfolding of the system:

Along with the constantly diminishing number of magnates of capital, who usurp and monopolize all advantages of this process of transformation, grows the mass of misery, oppression, slavery, degradation, exploitation; but with this too grows the revolt of the working class, a class always increasing in numbers, and disciplined, united, organized by the very mechanism of the process of capitalist production itself. The monopoly of capital becomes a fetter upon the mode of production, which has sprung up and flourished along with, and under it. Centralization of the means of production and socialization of labour at last reach a point where they become incompatible with their capitalist integument. This integument is burst asunder. The knell of capitalist private property sounds. The expropriators are expropriated.36

But this very process also was expected to lay the foundations for a new economic order in which the inner contradictions between the mode of production and the productive relations of capitalism would be resolved. As Marx saw this matter:

Modern Industry, on the other hand, through its catastrophes imposes the necessity of recognising, as a fundamental law of production, variation of work, consequently fitness of the labourer for varied work, consequently the greatest possible development of his varied aptitudes. It becomes a question of life and death for society to adapt the mode of production to the normal functioning of this law. Modern Industry, indeed, compels society, under penalties of death to replace the detail-worker of today, crippled by life-long repetition of one and the same trivial operation, and thus reduced to the mere fragment of a man, by the fully developed individual fit for a variety of labours, ready to face any change of production, and to whom the different social functions he performs, are but so many modes of giving free scope to his own natural and acquired powers.37

The social tensions bred by capitalism were too intense for the transition to be accomplished peacefully. Revolution was an essential part of the Marxian theory of crisis. The violent overthrow of the capitalist order, however, cannot be explained on technical economic grounds. Marx’s view of the dynamics of history was an essential prop to this conclusion.

Notes

1. Marx, Capital, vol. 1, preface to the edition of 1867 (Charles H. Kerr and Co., Chicago, 1912), p. 14.

2. The attack on Malthus was especially venomous. In his Theories of Surplus Value, Marx asserted:

The hatred of the English working class against Malthus – the ‘mountebank-parson,’ as Cobbett rudely calls him – is therefore entirely justified. The people were right here in sensing instinctively that they were confronted not with a man of science but with a bought advocate, a pleader on behalf of their enemies, a shameless sycophant of the ruling classes. (As reprinted in Marx and Engels on Malthus, Ronald L. Meek, ed., International Publishers, 1954, p. 123.)

3. Marx, Capital, vol. 1, pp. 692–3.

4. As we shall see later, Marx also challenged the other prop to Malthusian reasoning – the necessity of diminishing returns. Land, and diminishing returns to labour inputs applied to it, were erroneously construed, he maintained, within the classical tradition.

5. ibid., vol. 1, p. 95.

6. ibid., vol. 1, p. 189.

7. In this connexion, Marx observed:

. . . the number and extent of his so-called necessary wants, as also the modes of satisfying them, are themselves the product of historical development, and depend therefore to a great extent on the degree of civilization of a country, more particularly on the conditions under which, and consequently on the habits and degree of comfort in which, the class of free labourers has been formed. In contradistinction therefore to the case of other commodities, there enters into the determination of the value of labour-power a historical and moral element. Nevertheless, in a given country, at a given period, the average quantity of the means of subsistence necessary for the labourer is practically known. (ibid., vol. 1, p. 190.)

8. ibid., vol. 1, p. 46.

9. ibid., vol. 1, p. 46.

10. As Marx stated the point:

Whoever directly satisfies his wants with the produce of his own labour, creates, indeed, use-values, but not commodities. In order to produce the latter, he must not only produce use-values, but use-values for others, social use-values. (ibid., vol. 1, p. 48.)

11. ibid., vol. 1, p. 106.

12. Marx maintained that the necessity attached to ‘necessary’ labour time did not refer exclusively to the interests of the labourer. The minimal amount of labour input, he maintained, was also necessary to ‘the world of capitalists, because on the continued existence of the labourer depends their existence also’. (ibid., vol. 1, p. 240.)

13. ibid., vol. 1, p. 216.

14. ibid., vol. 1, p. 216.

15. ibid., vol. 1, p. 229.

16. ibid., vol. 1, p. 554.

17. ibid., vol. 1, p. 585.

18. ibid., vol. 1, p. 649.

19. ibid., vol. 1, p. 652.

20. ibid., Preface to the edition of 1867, p. 15.

21. ibid., vol. 1, p. 652.

22. ibid., vol. 1, p. 429.

23. Marx paid Ricardo high tribute for his preparedness to discard his earlier opinion, noting that he ‘expressly disclaimed it with the scientific impartiality and love of truth characteristic of him’. (ibid., vol. 1, p. 478n.)

24. ibid., vol. 1, p. 687.

25. ibid., vol. 1, p. 690.

26. The wisdom of this policy has also been endorsed on theoretical grounds by a leading analyst of development problems, Albert Hirschman; see his Strategy of Economic Development.

27. He enunciated this position forcefully, for example, in his essays on British Rule in India. Machine manufacturing, he observed, was destroying the traditional crafts; but sympathy for those thereby distressed was pointless. The outcome was inevitable.

28. ibid., vol. 1, pp. 697-8.

29. ibid., vol. 1, p. 691.

30. ibid., vol. 1, p. 707.

31. ibid., vol. 1, p. 680.

32. Some later Marxist commentators have expressed the organic composition of capital as image. Marx himself used the more abbreviated expression. The same conclusions are yielded by either notation.

33. On this point, he observed: ‘The law of capitalistic accumulation . . . in reality merely states that the very nature of accumulation excludes every diminution in the degree of exploitation of labour, and every rise in the price of labour, which could seriously imperil the continual reproduction, on an ever enlarging scale, of the capitalistic relation’. (ibid., vol. 1, p. 680.)

34. Strictly speaking, a falling rate of profit could be deduced from these premises even if the rate of exploitation increased, so long as any rise in surplus value was more than offset by the combined expansion of constant capital and variable capital.

35. The required conditions can be reduced as follows:

(1) C1 + C2 = C1 + V1 + S1 or

(2) C2 = V1 + S1

36. ibid., vol. 1, pp. 836–7.

37. ibid., vol. 1, p. 534.